*Law and Macroeconomics: Legal Remedies for Recessions*

That is the new and interesting book by Yair Listokin.  He argues that during a downturn regulators perhaps should be slower to approve utility rate increases, the IRS should run tax policy in a more stimulative manner, construction expenditures should be less regulated, and some environmental review should be eased.  Perhaps during the Greek financial crisis, all prices and debt contracts should have been lowered, by law, an immediate ten percent, to ease the deflation.

Should so many different parts of government, including at the state and local level, have macroeconomic goals added to their missions?  I am not sure, but I am glad to see an entire book devoted to the idea.

Comments

Wait, is this reference to government price controls being approvingly cited? - 'all prices and debt contracts should have been lowered, by law, an immediate ten percent, to ease the deflation.'

Seems as if Prof. Cowen might be growing nostalgic for his youth, with a vindictive president at the helm, and price controls being employed to combat a recession.

@c_p - do you know many Americans approved of Nixonian early 1970s price controls because they *work* (short term!) as evidenced by wartime rationing? Americans during WWII and the Korean war recalled these experiences of price controls and rationing working (short-term) and approved of Nixon's action. As for Greece, de facto courts applied a Cowenian "10%" rule or rather "100%" rule. We had a tenant who would not pay for rent after the recession, did not pay for three years, the store was empty, and when I wanted to sue, my Greek lawyer basically said that notwithstanding Greek law as written "on the books", in practice, due to the severe recession, the judge could rule that the tenant owed nothing, due to a sort of national emergency / commercial frustration. So we did not sue, sad but true.

Bonus trivia: Nixon actually restricted US rice exports to Japan (!) during his early 1970s wage and price freezes. That's one reason once offered as to why Japan protects its rice industry from foreign competition. A lame excuse, but they do have 'precedent'.

Ray Lopez, running circles around his blogging competition. A master.

The government should do what is right, what is legal and what is just all the time,,, period.

Isn't that what Trump is doing? It is too easy for these government levers to be abused for political purposes like pretending steel tariffs and banning Chinese manufactured cell phones are for the sake of national security.

Steel tariffs are for dumping and Huawei really does pose security threats.

https://www.wired.com/story/huaweis-many-troubles-bans-alleged-spies-backdoors/

"Dumping" is the term used to describe sales of a product that is part of a surplus, there is more of that product than can be easily sold at its pre-surplus price. So the price is lowered until the product can be sold. This happens every day in domestic circumstances. Used autos are sold for less than the blue book price, dumping. New, unsold clothing is donated to thrift stores which then sell $54 pants for $6. Isn't this "dumping"? US tariffs on sugar mean that Americans spend triple the world price on refined sugar, all to benefit a couple of south Florida families and annually pay for the purchase of new 4x4 diesel crew cab pick-ups for Red River Valley beet farmers. As long as that situation exists US trade policy is a pathetic, misunderstood joke on American consumers.

'Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product.' https://en.wikipedia.org/wiki/Dumping_%28pricing_policy%29

Of course there is no precise definition, but what happened to the U.S. consumer electronic manufacturers between 1960 - 1980 (remember RCA TVs?) in connection with Japanese imports is a fairly good illustration. Admittedly, this tends to tie in with the broader idea of mercantilism - there was no way that the Japanese were going to allow American imports to compete in the Japanese domestic market, thus ensuring enough of a profit margin for Japanese manufacturers to basically destroy the American competition through pricing that was tied to a longer term goal.

The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product.

Substitute "enforcement of intellectual property laws" for "dumping" and the sentence has exactly the same meaning.

Um, no, assuming that the IP laws are a two way street, of course. A patent by company 1 for a type of memory chip manufactured in country A does not preclude a patent by company 2 for a GPU manufactured in country B, especially in the sense that the memory and GPU are actually assembled into a product in country C by company 3, and then sold in all three countries.

There is no question that IP laws can be used in a variety of ways, but they are generally not the equivalent of dumping.

@prior - my understanding as well.

TMC, you are wrong on both counts.

Trump invoked section 232 which gives the POTUS power to unilaterally to impose tariffs but only for national security. He did it for steel and now he's looking at auto imports. BMW. Mercedes. For "national security." Dumping is fake news. His real reasons for the tariffs really require the authorization of Congress but Republicans only worry about executive power grabs if their guy isn't in the White House.

You are also wrong on Huawei. Both the UK and Germany say there is no threat and the Trump administration has failed to produce anything beyond allegations:

https://news.slashdot.org/story/19/02/20/235250/britain-and-germany-will-not-ban-huawei-citing-lack-of-spying-evidence

This is why people liked Keynes. This one weird trick reconciles a free society, rule of law, and macroeconomic stabilisation. However, modern democracies seem to lack fiscal continence in upswings that the economics of Keynes requires (see, D Trump).

(To be clear - I think the précis of this book sounds like the OPPOSITE of the economics of Keynes, which says you DON'T need to restructure contracts and upturn the rule of law.)

Good comment. The monetarist strain of macroeconomics that I learned was on board with "automatic stabilizer" concepts, but it emphasizes the importance of the behavior of the monetary authority to macroeconomic stability, which Keynes gave up on in the early 1930s, which is why his take on the Great Depression was wrong, as was the Keynesian take on The Great Recession.

Macroeconomics government agencies should have Fed accounts.

If they did, they would tend toward a cash flow accounting model and generally hold a savings to loan balance that matches their typical transactions. That means fewer missing inflows to outflow matches, their tree trunk is rounder, the velocity equation works, we have fewer jolts from government agencies.

This is just a different iteration of MMT; it's the fiscal policy, stupid (to paraphrase Clinton's political advisor). And, ironically, Austrian economics; let prices fall if that's what the market wants. But wealth, and keeping it, depend on a monetary policy that is the opposite of what Cowen is describing: it's the responsibility of the Fed to stop asset prices from falling and to inflate asset prices after the prices have fallen. But it's refreshing that someone has written this book, and encouraging that Cowen finds the thesis appealing. All the hand-wringing about excess inequality, and the remedy is right there in front of us: markets. Let freedom ring, and prices fall! Peter Boettke would be pleased.

Here's an article praising Jack Bogle for helping to tame "inflation": https://www.nytimes.com/2019/02/22/business/jack-bogle-index-funds-inflation.html. What? Index funds have low management costs; ergo, they help keep "inflation" low. What's wrong with this? Index funds work only if asset prices keep rising, but rising asset prices are not "inflation". Thus, index funds promote policies that keep asset prices rising. Is that possible? Is that even a good idea?

Great. Anothet article about bike-riding from someone who’s never learned to ride a bike.

The IRS runs (even has) a tax policy, beyond best effort to administer the (admittedly often poorly written) law?

As Tyler been visiting a location with legal marijuana. Giving regulators that much power is insane

I'm also sceptical of giving agencies this kind of power, but "the IRS should run tax policy in a more stimulative manner, construction expenditures should be less regulated, and some environmental review should be eased" seems like good policy to always do, at least from where we are now.

To is is how Canada works. And this is why i find the US focus on tax rates rather amusing. In the 80's and 90's Canadian provinces then finally the federal government were forced by political winds and economic strictures to live on their revenues. The laffer curve was maxed out.

Laying off regulators got an increase in tax revenues. Reforming regulations brought economic activity out of the underground economy. Tax revenue improved along with the economy.

The construction boom which stems from the influx of Chinese money has initiated a regulatory tightening up. In law we are overwhelmingly regulated here. In reality not so much. But regulators are showing up who haven't been seen in living memory. The economy is responding with a slowdown.

In my industry which is regulated by about 7 government agencies there was one lonely inspector who covered the east southern interior of BC. That is not the case this year, I'm actually meeting some of them as they come out of the woodwork. If i were them i wouldn't buy a house. As soon as tax revenues decrease due to their activity driving economic activity underground, which it is already doing, it will go back to what it was.

I wonder if the increase in economic activity under Trump is due to this?

Absolutely. I'm puzzled that everyone says the recovery is due to demand side stimulus. But the Fed hasn't been easier under Trump.

"Should ... government... have macroeconomic goals added to their missions?"
____________________________________________________________________

Gee, well let's look at the mission-statements (constitutions) of U.S. federal/state government.

No mention of using Law and Taxes to manipulate the general economy -- yet we already have massive government interventions at all levels of American economic activity. Politicians do whatever they want regardless of supposed Mission and Law.

(GMU will never be a socialist institution ?)

'No mention of using Law and Taxes to manipulate the general economy'

Man, you would think that some people would actually remember the Preamble to the Constitution, especially the 'general welfare' bit - 'We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.'

A document that is quite clear in laying out how laws and taxes are to be used within that general welfare framework, actually. Along with a process to modify the Constitution, so as to allow it to change over time - you know, allowing women to vote, or outlawing chattel slavery (labor without pay is still allowed within the framework of imprisonment, however).

Congressional and white house interns are unpaid.

They are not forced to labor, however - possibly the point of imprisonment was not clear enough, as prisoners are not allowed to leave prison to find a higher paid job.

Our current reading of 'Welfare' often conflicts with 'and secure the Blessings of Liberty'.

Welfare is improved when consumers have less income to spend buying consumption?

Who do businesses look to for help when consumers have less money to spend, but the business debt service remains the same, or may increase as suppliers refuse to ship to the business without cash payments for fear the business will fail from too little consumer demand?

Economies are zero sum. Cut payments to workers and consumers must cut consumer spending.

The worst time for thrift is in a downturn for the economy as a whole.

"Should so many different parts of government, including at the state and local level, have macroeconomic goals added to their missions? "

No, because it will all be offset by an inflation-targeting Fed anyways. I'm glad, though, that the author admits that regulation and environmental review slow down growth. (Why else would he hyptothesize that easing them would stimulate the economy?) But, easing regulation *decreases* costs and prices, so it can't be merely cyclically stimulative (inflationary). Thus, we know that the boost in growth would act through the *supply* side and, hence, deregulation should be permanent. There is no need to reverse the deregulation during the boom as it's not inflationary.

Yes, ease regulation to gain permanent, non-cyclical, trend-rate economic growth. Leave macroeconomic stabilization, fluctuation around the trend, to the Fed.

As it happens, I have been reading Cass Sunstein's book on Cost Benefit Analysis.

So, if we tinker with regulation based on the number of lives saved, for example, if we loosen regulation during a recession,

We

Kill more people

For a Buck.

Nice theory, to build some more automatic stabilizers (or semi-automatic) into government operations but I question how well the government agencies can do this. They might make the wrong decision, or more likely make the decision too late, e.g. relaxing regulations after the economy has already started recovering, and tightening them after it's already started to spiral down.

It's hard enough for the Fed to know when to clamp down or ease up. How are these other agencies going to do this? Follow commandments from the Fed? Some sort of Taylor rule?

Perhaps you can then explain to utility network shareholders that their returns are being sacrificed for someone else's gain. And then you can raise their equity beta and risk premiums in the process, and raise prices for all network customers. And if you're not raising the equity beta and/or risk premiums, then you're proposing a compulsory acquisition of capital with an opaque decision making process. How does that help with investing in the longer term growth of the economy?

Utility regulation is fundamentally about removing political interference from a process and building an institutional good (however imperfectly). How does sacrificing an institution to the whim of a new and all powerful regulator help?

Comments for this post are closed